2/06/2006

How Government Agriculture Policies Stifle Energy Independence

Today's print Wall Street Journal carries an article examining how Brazil managed to shift its gasoline consumption habits, so that it now relies heavily on diesel and ethanol fuel. Government action was required to build up the retail infrastructure, and Brazil simply mandated that its state-run oil company Petrobras sell ethanol at all of its fuel stations. Another critical component was reducing ethanol's price, relative to gasoline. Most of the price was dependent on the price of sugar, which was heavily subsidized. When Brazil reformed its agricultural subsidies, growers were forced to produce more ethanol with their crop, bringing down the price.

In the United States, we get most of our ethanol not from sugar, but from corn. This is due in no small part to the powerfulsugarlobby, which has managed to keep government price supports high at the same time as it has nearly shut foreign sugar imports out of the market, via massive tarriffs and import quotas. Looking at the commodities markets, today's price for international sugar (Sugar #11) is roughly three quarters that of domestic sugar (Sugar #14). These are wholesale prices for raw, unprocessed sugar, which means that the difference for consumers is even greater.

Ironically, the sugar regime is so restrictive that emergency imports were necessary after Hurricane Katrina to prevent domestic shortages; and even these imports were temporary, and did nothing to alleviate the long-term tightness in supply.

Corn production is also affected by sugar subsidies. The price of high-fructose corn syrup, a sugar substitute, closely tracks that of sugar itself. And corn also receives more direct subsidies, which are actually in breach of global trade agreements. The net effect of all this government intervention is to keep prices for sugar and corn higher than they need to be, making ethanol less able to compete with gasoline.

It is true that even with the status quo, ethanol is currently cheaper than gasoline. As of last year's technology, ethanol is price-competitive with gasoline when oil sells for above $50 per barrel, and including the current government ethanol subsidies, is competitive at $32 per barrel. But this does not include the significant cost required to set up the necessary infrastructure. At present, ethanol blends are only sold at about 500 stations, according to the Wall Street Journal article.

Is ethanol a viable alternative to gasoline? Brazil doesn't seem to mind. And at a time when our reliance on petroleum helps support our enemies in Iran, Syria, and Saudi Arabia, it is absurd to restrain the growth of alternatives with corrupt government price controls.